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Inflationary Pressures to be Revealed Across the Globe in Week Ahead

Inflationary Pressures to be Revealed Across the Globe in Week Ahead

2011-06-10 20:35:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The last two weeks have spurred increased volatility across the currency markets, amid disappointing data out of the United Kingdom and the United States, coupled with some less-than-encouraging statements made after key rate decisions that sparked a shift in risk-aversion across the board once more. The coming week could offer more of the same sentiment across the financial world, with key data coming from China and various G-7 nations. That being said, the underlying trend across the world’s major economies is whether or not recent spikes in inflation are merely blips on the radar, or “transitory,” as Federal Reserve Chairman Ben Bernanke has dubbed it, or if the price increases across the globe are, in fact, here to stay unless the world’s central banks begin the marked shift towards a tighter monetary policy.

• Chinese New Yuan Loans (MAY): June 12 – --:-- GMT

The People’s Bank of China has raised banks' reserve-requirement-ratio five times thus far this year in an effort to withdraw excess liquidity from capital markets, and as it appears that the rate decisions are working. The decline in loan growth last month suggests the tightening measures have had a significant impact on curbing credit expansion in the country, and the same is expected for May as well: forecasts show an estimated 650.0 billion worth of loans given in May, versus 739.6 billion in April.

These moves are predicated on rising inflationary pressures, which, as of Aprils’ reading, accelerated as the consumer price index showed 5.3 percent growth on a year-over-year basis The overall effect has been a stronger Yuan relative to the Dollar, which started off the year at a 6.6070 rate USD/CNY, and is now at 6.4801.

• United Kingdom Consumer Price Index (YoY) (MAY): June 14 – 08:30 GMT

The sustained period of low interest rates set forth by the Bank of England has certainly allowed inflationary pressures to move in on the British economy, with the most recent reading showing a 4.5 percent in prices in April, on a year-over-year basis. Inflation has been increasing at a steady pace from last July, when it was 3.1 percent; the 4.5 percent reading is the highest reading since it was 4.5 percent as well in October 2008.

Interest rate hike expectations are sliding for the Bank of England, with a mere 1.0 percent chance of a 25-basis point rate hike at their next meeting (even though they just held a Monetary Policy Committee meeting this past Thursday in which it was indicated that rates would remain low for the near-term), and only 26.0-basis points are priced in over the next 12-months, down from the 92.1-basis points being priced in on March 3.

Accordingly, another rise in inflation would not come to surprise the markets, but with it clear that the Bank of England will leave monetary policy accommodative in order to stoke growth, it is unlikely that such as reading would boost Sterling-based pairs. Join a DailyFX analyst for live coverage of event!

• United States Advance Retail Sales (MAY): June 14 – 12:30 GMT

Consumer demand is expected to continue to remain weak in May, with estimates for Advanced Retail Sales showing a 0.5 percent rate of contraction last month. Retail sales advanced by 0.5 percent in April, and the expected reading of -0.5 percent in May would be the first negative reading since June 2010. A recovery in consumer demand is an important part of the U.S. recovery, as little growth in the labor market has put increasing pressure on the Dollar. Consumer demand is also important for U.S. growth, as it comprises nearly 70 percent of the aggregate GDP figure. That being said, the Advance Retail Sales figure is the most import data release for the United States this coming week. Join a DailyFX analyst for live coverage of event!

• Swiss National Bank Rate Decision (JUN): June 16 – 07:30 GMT

The Swiss National Bank only adjusts their key interest rate every three months on a regular basis, and their second such meeting in 2011 will occur next Thursday. That being said, it is unlikely that the central bank raises its rates, as prices pressures have been contained amid an incredibly strong Swiss Franc relative to the other major currencies during the second quarter of the year.

The Overnight Index Swaps has only 18.0-basis points priced into the Franc over the next 12-months, and forecasts a -0.4 percent chance of a 25-basis point rate hike at their meeting. Any further gains made by the Franc over the coming period will have to be predicated on risk-aversion, not on interest rate hike speculation. Join a DailyFX analyst for live coverage of event!

• United States U. of Michigan Consumer Confidence (JUN P): June 17 – 13:55 GMT

U.S. consumer confidence is forecasted to slide slightly in June’s preliminary reading, after rising more than expected in May. The figure remains above the 70.0 level, at 74.3 at the prior reading. The figure is expected to remain above said level, with a 74.0 initial forecast for the preliminary reading for June.

As noted in prior confidence readings, “Should oil prices remain elevated about $100 per barrel, sentiment could further wane headed into the summer as gas prices typically rise during the middle of the year in the United states.” Accordingly, with oil oscillating around $100 per barrel now, an erosion in confidence would not be entirely unexpected. Join a DailyFX analyst for live coverage of event!

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter:@CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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